FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES ACT OF 1934
For the quarter ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _________
Commission file number 01-18695
WORK RECOVERY, INC
(Exact name of registrant as specified in its charter)
Delaware * 86-0848910*
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2341 South Friebus Avenue, Suite 14, Tucson, Arizona 85713
(Address of principal executive offices) (Zip Code)
(520) 322-6634
Registrant's telephone number, including area code
Not applicable
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
* Note: As part of the bankruptcy reorganization plan, the Registrant's
corporate domicile was move on February 1, 1997 from Colorado to Delaware.
The IRS Employer Identification Number of the Colorado corporation is
68-0165800.
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Registrant has only one class of common stock outstanding. The Company
estimates that on May 19, 1997, there are approximately 14,717,234 shares
of New Common Stock issued or reserved for issuance pursuant to the Amended
Plan of Reorganization.
Before the Effective date of the Plan of Reorganization, February 1, 1997,
the Registrant had only one class of common stock outstanding, of which
approximately 45,918,623 shares were outstanding as of January 31, 1997.
<PAGE>
FORM 10-Q
WORK RECOVERY, INC.
For the Quarter ended March 31, 1997
INDEX
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets at March 31, 1997 (Successor Company)
and June 30, 1996 (Predecessor Company)....................................1
Consolidated Statements of Operations for the two-months ended
March 31, 1997 (Successor Company), one-month ended January 31, 1997,
three-months ended March 31, 1996, seven-months ended January 31, 1997
and nine-months ended March 31, 1996 (Predecessor Company)...............2-3
Consolidated Condensed Statements of Cash Flows for the two-months
ended March 31, 1997 (Successor Company), seven-months ended January
31, 1997 and nine-months ended March 31, 1996 (Predecessor Company)........4
Notes to Consolidated Financial Statements.................................5
Item 2. Management's Discussion and Analysis of Financial Condition
Results of Operations............................................10
Part II. Other Information:
Item 1. Legal Proceedings................................................14
Item 2. Changes in Securities............................................14
Item 6. Exhibits and Reports on Form 8-K.................................15
Signatures.................................................................16
<PAGE> 1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WORK RECOVERY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
March 31, June 30,
1997 1996
---------- ----------
ASSETS (unaudited)
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 1,622 $ 189
Receivables, including Related Party, net 195 318
Inventories 679 813
Prepaid Expenses and Other Assets 219 183
---------- ----------
Total Current Assets 2,715 1,503
Property, Plant and Equipment, net 1,958 3,738
Intangible Assets 39,830 123
Other Assets 433 185
---------- ----------
Total Assets $ 44,936 $ 5,549
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts Payable $ 2,301 $ 495
Accrued Expenses 2,094 98
Notes Payable, including Related Parties 1,956 115
--------- ---------
Total Current Liabilities 6,351 708
Long-Term Debt 1,372
Liabilities Subject to Compromise 11,081
--------- ---------
Total Liabilities 7,723 11,789
Commitments and Contingent Liabilities
Shareholders' Equity (Deficit):
New Common Stock, $.01 par value:
Authorized 48,000,000 shares, issued and
outstanding 14,714,593 shares 147
New Preferred Stock, $.01 par value, 2,000,000
shares authorized, no shares issued and outstanding
Old Common Stock 184
Additional Paid-in Capital 38,507 57,311
Old Preferred Stock 1,318
Accumulated Deficit (1,441) (65,053)
-------- ---------
Total Shareholders' Equity (Deficit) 37,213 (6,240)
------- ---------
Total Liabilities and Shareholders' Equity (Deficit) $44,936 $ 5,549
======= ========
See notes to Consolidated Financial Information
</TABLE>
<PAGE> 2
WORK RECOVERY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
Successor Company Predecessor Company
----------------- ---------------------------------------
Two-Months Ended One-Month Ended Three-Months Ended
March 31, 1997 February 1, 1997 March 31, 1996
-------------- ---------------- --------------
<S> <C> <C> <C>
Net Revenues:
Sales and Related Services $ 94 $ 28 $ 555
Clinic Services 9 2 993
---------- ------------ --------------
Total Net Revenues 103 30 1,548
Cost of Sales 133 269 2,054
---------- ------------ --------------
Gross Profit (Loss) (30) (239) (506)
Expenses:
Selling, General and Administrative 707 5,798 1,535
Amortization of Excess Reorganization
Value 675
Impairment Losses 707
---------- ------------ --------------
Loss From Operations (1,412) (6,037) (2,748)
---------- ------------ --------------
Other Income (Expense):
Interest Expense (33) (25) (73)
Interest Income 4 3
Miscellaneous Expense (160) (14)
---------- ------------ --------------
Net Other Expense (29) (185) (84)
---------- ------------ --------------
Loss From Operations Before Reorganization
Items, Income Taxes and Extraordinary
Gain on Debt Discharge (1,441) (6,222) (2,832)
Reorganization Items (16,134)
Loss Before Income Taxes and Extraordinary
---------- ----------- --------------
Gain on Debt Discharge (1,441) (22,356) (2,832)
Income Taxes
Net Loss Before Extraordinary Gain
on Debt Discharge ---------- ----------- --------------
(1,441) (22,356) (2,832)
Extraordinary Gain on Debt Discharge 16,819
---------- ----------- --------------
Net Loss $ (1,441) $ (5,537) $ (2,832)
========== =========== ==============
Loss per Common Share $ (.10)
===========
See Notes to Consolidated Financial Information
</TABLE>
<PAGE> 3
WORK RECOVERY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
Successor Company Predecessor Company
----------------- ---------------------------------------
Two-Months Ended Seven-Months Ended Nine-Months Ended
March 31, 1997 February 1, 1997 March 31, 1996
<S> <C> <C> <C>
Net Revenues:
Sales and Related Services $ 94 $ 1,252 $ 1,258
Clinic Services 9 76 3,350
------------ --------------- --------------
Total Net Revenues 103 1,328 4,608
Cost of Sales 133 1,030 7,170
------------ --------------- --------------
Gross Profit (Loss) (30) 298 (2,562)
Expenses:
Selling, General and Administrative 707 7,726 5,862
Amortization of Excess Reorganization
Value 675
Settlement with Investors 185
Loss from Unusual Transactions
and Activities 128
Additional Bad Debts 1,014
Impairment Losses 707
----------- --------------- --------------
Loss From Operations (1,412) (7,428) (10,458)
----------- --------------- --------------
Other Income (Expense):
Interest Expense (33) (196) (250)
Investment Losses (922)
Interest Income 4 3 266
Miscellaneous Expense (236)
----------- ------------- --------------
Net Other Expense (29) (429) (906)
Loss From Operations Before
Reorganization Items, Income Taxes
and Extraordinary Gain on Debt
Discharge (1,441) (7,857) (11,364)
Reorganization Items (22,927)
----------- ------------- ---------------
Loss Before Income Taxes and
Extraordinary Gain on Debt Discharge (1,441) (30,784) (11,364)
Income Taxes
----------- ------------- ---------------
Net Loss Before Extraordinary Gain
on Debt Discharge (1,441) (30,784) (11,364)
Extraordinary Gain on Debt Discharge 16,819
----------- ------------- ---------------
Net Loss $ (1,441) $ (13,965) $ (11,364)
=========== ============= ===============
Loss per Common Share $ (.10)
===========
</TABLE>
See Notes to Consolidated Financial Information
<PAGE> 4
WORK RECOVERY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Successor Company Predecessor Company
----------------- --------------------------------------
Two-Months Ended Seven-Months Ended Nine-Months Ended
March 31, 1997 February 1, 1997 March 31, 1996
---------------- ------------------ -----------------
<S> <C> <C> <C>
Net Cash Used in Operating Activities $ (1,596) $ (1,396) $ (5,909)
----------- ------------ -----------
Cash Flows from Investing Activities:
Investment in Unconsolidated Affiliates (567)
(Purchases)Sales of Clinical Centers, Property,
Plant and Equipment In-Service (119) 1,217 (328)
Loans to officers and Former Officers (384)
------------ ----------- -----------
Net Cash (Used in)Provided by Investing
Activities (119) 1,217 (1,279)
Cash Flows from Financing Activities:
Proceeds from Issuance of Common Stock 1,816 924
Net Repayments on Short-Term Debt (144) (73) (162)
Proceeds from Notes Payable 1,800 1,057 325
Proceeds from Issuance of Long-Term Debt 425
Repayment of Long-Term Debt (133) (968) (625)
Dividends Paid (14) (14)
------------ ----------- ------------
Net Cash Provided by Financing Activities 3,325 2 887
------------ ----------- ------------
Net Increase (Decrease) in Cash 1,610 (177) (6,301)
Cash at Beginning of Period 12 189 6,554
------------ ----------- ------------
Cash at End of Period $ 1,622 $ 12 $ 253
============ =========== ============
</TABLE>
See Notes to Consolidated Financial Information
<PAGE> 5
1. Basis of Accounting
The accompanying unaudited consolidated financial statements of Work Recovery,
Inc. ("WRI") and its wholly-owned subsidiary, Work Recovery Centers, Inc.
("WRCI") (collectively, the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information
and with the instruction to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the conolidated financial statements include
all adjustments which, except for fresh-start adjustments (see Note 3),
consist only of normal recurring adjustments necessary for a fair presentation
of operating results for the interim period. Operating results for the nine-
month period ended March 31, 1997 are not necessarily indicative of the results
that may be expected for the year ending June 30, 1997.
For further information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended
June 30, 1996.
The accompanying unaudited financial statements have been prepared on a going
concern basis which assumes continuity of operations and realization of assets
and liquidation of liabilities in the ordinary course of business. The
appropriateness of using the going concern basis is dependent upon, among
other things, success of future operations and the ability to generate
sufficient cash from operations and financing sources to meet obligations.
2. Reorganization
On May 29, 1996, the Company filed voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the
United States Bankruptcy Court for the District of Arizona (the "Bankruptcy
Court").
The creditors and equity holders approved the Company's Plan of Reorganization
("the Plan") and on December 4, 1996 the Bankruptcy Court issued its order
confirming the Plan. On February 1, 1997 (the "Effective Date"), the Company
adopted a restated certificate of incorporation, the principal effects of
which were to authorize 48,000,000 shares of new common stock ("New Common
Stock") of which 14,714,593 shares were issued under the Plan as follows:
* Holders of existing shares of Common Stock ("Old Common Stock") received
approximately 4.6 million shares of New Common Stock at the exchange rate of
one share of New Common Stock for every 10 shares of Old Common Stock. In
addition, the holders of Old Common Stock received warrants ("the Warrants")
for the purchase of New Common Stock at a share
<PAGE> 6
price of $2.50. One Warrant was issued for every ten shares of Old Common
Stock held by the shareholder. The Warrants will expire either 180 days after
the Effective Date or the date upon which 2,700,000 shares of New Common Stock
have been purchased pursuant to the exercise of the Warrants. As of March 31,
1997 and May 15, 1997 the number of Warrants exercised totaled 326,164 and
327,805, respectively.
* Allsup Inc. received a total of 2.6 million shares of New Common Stock, 1.3
million upon converting its prepetition and postpetition loans to equity
($1,000,000 in total) and 1.3 million upon payment to the Company of $1,000,000
in cash.
* The TEAM for New Management, Board of Directors, and key employees received
2.5 million shares of New Common Stock.
* Recovery Lender received 1.3 million in shares of New Common Stock after
electing to convert its various loans with the Company to equity.
* Holders of Series B and Series C preferred stock ("Preferred Stock") received
0.1 million shares of New Common Stock at the exchange rate of one share of New
Common Stock for every 10 shares of Old Common Stock to which their Preferred
Stock could have been converted. The holders of Preferred Stock also received
cash equal to 20% of accrued dividends. The Company is still in the process of
completing all of the Preferred Stock exchanges and dividend payments.
* A reserve of 1.5 million shares of New Common Stock was made for the filers of
securities fraud claims. The Company has not yet issued any shares from this
reserve.
* Approximately 1.8 million in remaining shares of New Common Stock were issued
in settlement of various claims against the Company. The Company is still in
the process of issuing new shares in settlement of these claims.
The Plan also provided for the holders of old employee stock options to receive
one new option for each 10 options previously held. New options issued to
existing holders plus new options issued to all employees on the Effective
Date totaled 211,805 shares. The options were split into two categories,
standard shares and performance shares. The exercise price for standard
options and performance options are $2.25 and $2.70 (120% of $2.25) per share,
respectively. All options are scheduled to vest in equal amounts over a three
year period with the first one-third vesting February 1, 1998.
All administrative claims submitted to the Court were approved and have been
accounted for in the accompanying financial statements.
See the Company's Disclosure Statement and Amended Joint Plan of Reorganization
dated October 4, 1996, and the modification of the Plan dated November 25, 1996
for more detailed information of the Plan.
<PAGE 7>
3. Fresh-Start Reporting
As of the Effective Date, the Company adopted fresh-start reporting in
accordance with AICPA Statement of Position 90-7 ("SOP 90-7"), "Financial
Reporting By Entities in Reorganization Under The Bankruptcy Code" ("Fresh-
Start Reporting"). In connection with the adoption of Fresh-Start Reporting,
a new entity has been deemed created for financial reporting purposes. The
periods presented prior to the Effective Date have been designated "Predecessor
Company" and the period subsequent to the Effective Date has been designated
"Successor Company". For financial reporting purposes, the Company accounted
for the consummation of the Plan effective February 1, 1997. In accordance with
Fresh-Start Reporting, the Company valued its assets and liabilities at fair
values and eliminated its retained earnings at the Effective Date. The
reorganization value of the company was determined on the basis of discounted
cash flows of the new entity for a period of ten years. The total reorgaization
value as of the Effective Date was $36,765,000 which was approximately
$40,350,000 in excess of the aggregate fair value of the Company's tangible and
identified intangible assets. Such excess, and other eliminations related to
the plan, is included in Intangible Assets in the accompanying consolidated
balance sheet and is being amortized on a straight-line basis over a ten-year
period.
The components of reorganization items included in the accompanying financial
statements are as follows (in thousands):
Fresh-Start Reporting:
Establish Reorganization Value (new Common Stock) $36,765
Eliminate Old Common Stock (57,495)
Eliminate Retained Deficit 79,018
Debt Converted to Common Stock (2,053)
Preferred Stock converted to Common Stock (1,318)
Claims Settled with Issuance of Common Stock (9,445)
Common Stock Issued to management and key employees (5,138)
Eliminate Existing Organization Costs 16
______
Excess Reorganization Value $40,350
------
Reorganization Items directly related to bankruptcy proceedings:
Allowed Claims $22,061
Legal Fees 616
Other Professional Fees 209
Other 41
_______
Total Reorganization Items $22,927
-------
<PAGE> 8
Gain recognized on debt discharge:
Elimination of Bankruptcy Claims and Related Claims $38,937
Issuance of New Common Stock (17,748)
Re-classification of Current Liabilities (3,180)
Re-classification of Long Term Debt (1,190)
______
Gain on Debt Discharge $16,819
------
4. Inventories
<TABLE>
<CAPTION>
Inventories consist of the following: March 31, 1997 June 30, 1996
-------------- -------------
<S> <C> <C>
Raw Materials $ 443,000 $ 631,000
Finished Goods 173,000 121,000
Work-in-Progress 153,000 197,000
Reserve for Excess and Obsolete Inventory (90,000) (136,000)
--------- ----------
$ 679,000 $ 813,000
========= ==========
5. Funding Agreements
In July, 1996 the Bankruptcy Court issued an order authorizing a loan agreement
the Company entered into in May, 1996 with Recovery Lender, L.L.C., an Arizona
limited liability company ("Recovery Lender"), for funding up to $5,000,000,
$900,000 of which had been funded as of March 31, 1997. See Liquidity and
Capital Resources.
In October, 1996 the Company entered into an investment agreement with Allsup,
Inc. an Illinois company ("Allsup"), to provide additional financing for
operations and for funding of the Plan. Pursuant to this agreement, which
was approved by the Bankruptcy Court in November 1996, the Company and Allsup
executed a loan agreement pursuant to which Allsup advanced $500,000 to the
Company as a loan on terms similar to that of Recovery Lender. On the Effective
Date, Allsup acquired New Common Stock for $1,000,000 and converted both its
prepetition and postpetition advances (totaling $500,000 and $500,000,
respectively) to New Common Stock. As a result, Allsup now owns 18% of the
outstanding New Common Stock of the Company and warrants to acquire additional
shares of New Common Shares. See Note 7 and Liquidity and Capital Resources.
<PAGE> 9
6. Loan Agreements
In January, 1997, the Company entered into a Loan Agreement with Allsup and
Quest Trading, Inc. (collectively, "the Lenders") pursuant to which the Lenders
have agreed to loan the Company up to $2,000,000 in one or more advances (the
"Loan"), subject to the satisfaction of certain conditions set forth in the
Loan Agreement. On March 25, 1997, the Company borrowed $1,800,000 of the
Loan which is included in Notes Payable in the accompanying balance sheet.
The Loan will revolve and, provided applicable conditions are satisfied,
repaid principal may be reborrowed until the maturity of the Loan, December
31, 1997. The Loan is being used to support the working capital needs of
the Company and to make payments due under the Plan.
On February 3, 1997, pursuant to the Loan Agreement, the Lenders were granted
100,000 options to purchase shares of New Common Stock of the Company at an
exercise price of $1.56 per share.
On April 30, 1997, pursuant to the Loan Agreement, the Lenders were granted
225,000 options to purchase shares of New Common Stock of the Company at an
exercise price of $0.42 per share. The options will expire twelve months
from date of delivery to the Lenders.
7. Earnings Per Share
Earnings per share for the two-months ended March 31, 1997 have been calculated
on the basis of 14,714,593 shares outstanding. Common stock equivalents,
including warrants and stock options, are excluded from the computation
because their inclusion would be anti-dilutive. Earnings (loss) per common
and common equivalent share data is not meaningful for periods prior to
February 1, 1997 due to the significant change in the capital structure of
the Company.
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company's Ability to Continue as a Going Concern
The Company has suffered recurring losses from operations and there is
substantial doubt about its ability to continue as a going concern without
infusion of additional capital. The Company emerged from bankruptcy on
February 1, 1997 (the "Effective Date") pursuant to the Debtors' Restated
Amended Joint Plan of Reorganization dated November 25, 1996 (the "Plan"). On
the Effective Date, the Company had and continues to have substantial
obligations to certain bankruptcy creditors and others. The Company
continues to experience slow sales of ERGOS, its only product, and as a
result will need additional capital to continue as a going concern the
source of which is unknown at this time. See Liquidity and Capital Resources.
General
As discussed in Note 3 to the accompanying Consolidated Financial Statements,
the Company has applied Fresh-Start Reporting as of the Effective Date which
has resulted in significant changes to the valuation of certain of the
Company's assets and liabilities, and to its shareholders' equity. In
connection with the adoption of Fresh-Start Reporting, a new entity has been
deemed created for financial reporting purposes. The periods prior to the
Effective Date have been designated "Predecessor Company" and the period
subsequent to the Effective Date has been designated "Successor Company". For
purposes of the discussion of Results of Operations for the three-months and
nine-months ended March 31, 1997, the results of the Predecessor Company and
Successor Company have been combined.
<PAGE> 11
Results of Operations
The following table sets forth certain statements of operations data reflecting
the combinations discussed above :
</TABLE>
<TABLE>
<CAPTION>
Three-Months Ended Nine-Months Ended
------------------ ------------------
March 31, March 31,
1997 1996 1997 1996
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net Revenues $ 133 $ 1,548 $ 1,431 $ 4,608
Cost of Sales 402 2,054 1,163 7,170
Gross Profit (Loss) (269) (506) 268 (2,562)
Selling, General and Administrative 6,505 1,535 8,433 5,862
Amortization of Excess
Reorganization Value 675 675
Settlement with Investors 185
Loss from Unusual Transactions
and Activities 128
Additional Bad Debts 1,014
Impairment Losses 707 707
Interest Expense (58) (73) (229) (250)
Investment Losses (922)
Interest Income 4 3 7 266
Miscellaneous Expense (160) (14) (236)
Reorganization Items (16,134) (22,927)
Extraordinary Gain
on Debt Discharge 16,819 16,819
Net Loss (6,978) (2,832) (15,406) (11,364)
</TABLE>
The following discussion of the results of operations for the three-months and
nine-months ended March 31, 1997, as compared to the three-months and nine-
months ended March 31, 1996 and financial condition of the Company as of March
31, 1997, as compared to the fiscal year ended June 30, 1996, should be read in
conjunction with the financial statements and related notes appearing under Part
I. - Item 1.
Net revenues for the three-months and nine-months ended March 31, 1997
decreased, by 91.4% and 68.9%, respectively, as compared to the corresponding
periods of fiscal 1996. The Company is experiencing slower than expected sales
of its ERGOS Systems and did not record any system sales during the quarter
ended March 31, 1997. Clinic services for the three-month and nine-month
periods ended March 31, 1997 as compared to the comparable periods of the
prior fiscal year decreased approximately 98.9% and 97.5%, respectively,
due to the sale or closure of all but one of the Company's centers. Cost of
sales decreased for the three-month and nine-month periods ended March 31,
1997 from the comparable periods of the prior fiscal year primarily due to
<PAGE> 12
the closure and sale of the Company's centers during the second half of
fiscal 1996 and the decrease in sales of ERGOS Systems.
Selling, general and administrative expenses ("SG&A") increased approximately
323.8% and 43.9% during the three-month and nine-month periods ended March 31,
1997 compared to the comparable periods of fiscal 1996. Increased SG&A costs
resulted primarily from equity issued to the Team for New Management and key
employees in accordance with the Plan. A total of 2,300,000 common shares
were issued to members of the Team and key employees for an average discounted
price of $2.09 per share.
The excess reorganization value is being amortized over ten years.
The nature of settlement with investors of $185,000, loss from unusual
transactions and activities of $128,000, additional bad debts of $1,014,000,
impairment losses of $707,000 and investment losses of $922,000 for the nine-
months ended March 31, 1996 are discussed in the Company's Form 10-K and
accompanying consolidated financial statements for the year ended June 30,
1996.
Reorganization items are directly related to the Company's bankruptcy
proceedings (see Note 3 of the accompanying consolidated financial statements).
In connection with the emergence from bankruptcy, the Company recognized an
extraordinary gain of approximately $16,819,000 related to the discharge of
debt (see Note 3 of the accompanying financial statements).
Cash increased $1,433,000 from approximately $189,000 at June 30, 1996 to
approximately $1,622,000 at March 31, 1997. Net cash used during the nine-
month period included approximately $2,992,000 in operating activities,
$1,318,000 for repayment of debt and $193,000 for the purchase of property,
plant and equipment. The principal source of cash was additional borrowings
of $2,857,000, issuance of common shares of $1,816,000 and the sale of centers
and real property totaling approximately $1,291,000.
Net property, plant and equipment decreased approximately $1,780,000 from June
30, 1996 to $1,958,000 at March 31, 1997 primarily due to the sale of property.
The total reorganization value of the Company as of the Effective Date was
$36,765,000 which was approximately $40,350,000 in excess of the aggregate
fair value of the Company's tangible and identified intangible assets. Such
excess, and other eliminations related to the plan, is included in Intangible
Assets in the accompanying consolidated balance sheet and is being amortized
on a straight-line basis over a ten-year period (see Note 3 of the
accompanying consolidated financial statements).
Accounts payable and accrued expenses increased approximately $3,802,000 from
June 30, 1996 to $4,395,000 at March 31, 1997 primarily as a result of
reclassification of items from liabilities subject to compromise and an
increase in unpaid fees to professionals in connection with the bankruptcy
proceedings.
<PAGE> 13
Notes payable increased from $115,000 at June 30, 1996 to $1,956,000 at March
31, 1997 as a result of additional borrowings.
In accordance with Fresh-Start Reporting, the Company valued its assets and
liabilities at fair values and eliminated its accumulated deficit as of the
Effective Date.
Liquidity and Capital Resources
The Company has continued to sustain losses and as of March 31, 1997, had a
working capital deficit of approximately $3,636,000. Moreover, it is unlikely
the Company will be able to generate sufficient revenues from operations to
meet its working capital needs without a substantial increase in sales volume
of ERGOS Systems, its sole product. Pursuant to the Plan, the Company is
obligated to pay a total of $1.3 million in cash to its creditors during the
quarter ending June 30, 1997. The projected source of such payments is expected
to be the proceeds from the Loan described in Note 6 of the accompanying
consolidated financial statements and as described below.
Subsequent to emerging from bankruptcy the Company received proceeds of
$1,000,000 from the sale of Common Stock to Allsup, Inc. ("Allsup"),
$814,000 from the exercise of Warrants and $1,800,000 from the Loan from
Quest and Allsup ("the Lenders") described in Note 6.
It is unlikely the Company will be able to borrow additional funds or will
receive additional funds from the exercise of Warrants issued to the holders
of Common Stock in the Predecessor Company. However, the Company believes
that it has sufficient cash on hand to meet its obligations under the Plan
and working capital needs during the fiscal quarter ended June 30, 1997.
The Company is seeking appropriate strategic alliances with other companies
for enhanced sales and marketing opportunities that will increase ERGOS sales
and other solutions to its working capital needs. The Company is also
considering overhead reduction measures that will reduce operating expenses.
There can be no assurance, however, that the Company will be successful in
obtaining additional working capital to continue as a going concern.
Factors That May Affect Future Results
Management's Discussion and Analysis of Results of Operations and Financial
Condition contains forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 that involve a number of risks and
uncertainties. While the Company believes that such forward looking statements
are accurate as of the date hereof, the actual results and conditions could
differ materially from the statements contained herein.
There can be no assurance that the Company will be able to generate sufficient
sales of its product to meet its working capital needs in the future or to repay
the Loan from the Lenders described in Note 6 in the accompanying consolidated
financial statements. Moreover, the Lenders contend that the Company is in
default of the Loan because it has failed to retain a sales manager within
an arbitrary period established by the Lenders (which the Company believes
is unreasonable) pursuant to the Loan Agreement. The Company does not
believe that it is in default and is diligently
<PAGE> 14
attempting to retain a sales manager that is acceptable to the Lenders. Should
the Lenders accelerate the due date of the Loan, the Company would not have
sufficient capital available to repay the Loan and meet its obligations under
the Plan.
The Company will have to overcome the stigma of having been through
reorganization as well as the potential lingering negative impact of the
controversies created by the mismanagement and misfeasance of certain members
of prior senior management.
The Company will also be subject to risks and uncertainties resulting from
changes in technology, competition, and increased regulation of the health
care industry.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On May 29, 1996, the Company filed a voluntary petition in the United States
Bankruptcy Court for the District of Arizona to reorganize under Chapter 11
of Title 11 of the United States Bankruptcy Code. Effective February 1, 1997,
the Company emerged from Chapter 11.
The reorganization process resulted in the cancellation and/or restructuring
of substantial obligations of the Company. The Company recorded an
extraordinary gain of approximately $16,819,000 related to the discharge of
debt. The provision for settlement of disputed claims represents management's
estimate of the net amount required to cover all outstanding disputed claims
included in liabilities subject to settlement based on current facts and
circumstances.
Investigations
On August 11, 1995 the Securities and Exchange Commission ("Commission") entered
an Order Directing Private Investigation ("Order") in the Matter of Work
Recovery, Inc. for actions and conduct occurring prior to the initiation of
the investigation. The Commission has advised the Company that the Order is
non-public and that the existence of the Order should not be construed as an
indication by the Commission that any violation has occurred. The FBI has
also been investigating the Company. The Company is cooperating fully with
the Commission and the FBI.
Item 2. Changes in Securities
As discussed in Note 6 of the accompanying consolidated financial statements,
options to purchase an aggregate of 325,000 shares of Common Stock were granted
to the Lenders of the Loan ("Lender Options"). The Lender Options have an
exercise price of $1.56 per share on the first 100,000 options and $0.42 per
share on the remaining 225,000 options. These options expire one year from the
date of grant.
<PAGE> 15
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
A Report on Form 8-K, dated January 30, 1997, was filed by the Registrant,
which reported under Item 3 and Item 7 the Effective Date, February 1,
1997, for emergence from bankruptcy, material features of the Amended
Plan and information concerning the capitalization, assets and liabilities
of the reorganized company.
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WORK RECOVERY, INC.
(Registrant)
/s/ DORCAS R. HARDY
Dorcas R. Hardy, Chief Executive Officer (Principal Executive Officer)
Date: May 20, 1997
/s/ EDWARD M. YOUNG
Edward M. Young, Chief Operating Officer and Chief Financial Officer (Principal
Financial and Accounting Officer), Acting
Date: May 20, 1997
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